Chart patterns are specific price formations on a chart that help predict future price movements. They reflect market psychology and the battle between buyers and sellers.
Reversal Patterns
| Pattern | Signal | Reliability |
|---|---|---|
| Head & Shoulders | Bearish reversal | High |
| Inverse H&S | Bullish reversal | High |
| Double Top | Bearish reversal | Good |
| Double Bottom | Bullish reversal | Good |
| Rising Wedge | Bearish | Moderate |
| Falling Wedge | Bullish | Moderate |
Continuation Patterns
| Pattern | Signal | Reliability |
|---|---|---|
| Bull Flag | Bullish continuation | Good |
| Bear Flag | Bearish continuation | Good |
| Triangle | Breakout direction | Moderate |
| Pennant | Continuation | Moderate |
| Rectangle | Continuation | Moderate |
Trading Patterns
- Identify the pattern on the chart
- Wait for breakout confirmation
- Enter on breakout with volume
- Stop loss below/above pattern boundary
- Target = pattern height projected from breakout
Key Points
- Patterns need confirmation before trading
- Higher timeframes = more reliable patterns
- Combine with volume and indicators
- No pattern works 100% of the time